Types by cost/frequency

An important question to consider when starting your marketplace company is what kind of marketplace are you? There are different ways to define marketplaces, but one helpful way is to think about the purchase amount and purchase frequency. 

Low cost, low frequency

This is the most common type of marketplace. Even with low transaction cost and low repeat user purchase, marketplaces tackling a space with a large market size and those that can build effective acquisition loops while capturing enough value or tax for themselves can create wildly successful companies.

The biggest risks are as expected: customer acquisition costs are too high, margins are too low, or the market size just isn’t big enough. It will be critical to find ways to be operationally efficient, acquire and retain users, and protect themselves against competition. Finding a specific niche and creating strong network effects will help establish your brand and advantage, and creating innovative and low-cost growth loops can help get you there quickly.

Low cost, high frequency

This type of marketplace taps into everyday behaviors like shopping for necessities or serving lifestyle habits that happen frequently. It could be a company to help walk dogs, take kids to school, get dinner or lunch delivered, or even for ridesharing. These marketplaces benefit from building user retention through habits or perks and can have a high lifetime value for users.

The risks of a low cost transaction company include low margins and churn. Because the transaction size is small, there is less wiggle room to allow for high acquisition cost or excessive engagement tactics, so focusing on product features that promote efficiency and retention will be key. Creating loyalty programs, subscriptions, or recurring scheduling are some ways to encourage habitual use.

High cost, low frequency

There are certain things consumers will occasionally splurge on, such as vacation rentals, corporate retreats, or expensive art or home furnishings. These marketplaces are used fairly infrequently by consumers, but provide a lot of value when they are used.

Big risks for this type of marketplace is disintermediation and competition. You’ll need to think through how to keep sellers incentivized to transact on the platform itself rather than find ways to circumvent it to avoid fees or go to competitors, and how to protect yourself from new entrants coming and creating similar platforms. Adding features for extra trust and convenience such as insurance to protect assets, identity verification, and payment protection for users are some ways to mitigate these risks.

High cost, high frequency

This type of marketplace is extremely rare. Finding this niche would be enormous as you would have the benefits of high transaction costs and therefore higher margins and high-frequency to extract value from repeat users. It’s hard to find examples of this type of company, but Faire, the marketplace for wholesale products, may be one as retailers and businesses make repeated high-value purchases for their store’s inventory.

Risks for this type of company are competition - everyone will want to build a competitor if you discover this market. Creating network effects and growing quickly will help build a moat to retain market share.


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